Like every economy around the world, China experienced a severe downturn amid the COVID-19 crisis in 2020. Unlike most other big countries, China pursued hard lockdowns well into 2022 and failed to benefit from a surge in post-pandemic consumer spending. Along with harsh, inconsistent regulation of sectors like tech, this has caused China’s economy to underperform for the past three years.
Negative news about China continued to pile up throughout August. Factory activity shrunk for a fifth straight month. The problematic real estate sector delivered bad news, with Evergrande’s stock price tumbling when it resumed trading for the first time in almost 18 months and Country Garden posting a record first-half loss of almost $7 billion.
The longstanding concerns about weak consumer spending, falling manufacturing output and the potential bursting of the real estate bubble have all taken their toll on Chinese equities markets. Onshore Chinese shares are down 7.7% in dollars for August and 6.9% year-to-date (the S&P YTD is up 18.7%). Down over 8%, Hong Kong’s Hang Seng Index is one of August’s worst performers among Bloomberg’s equity gauges.
As bad as all these indicators are, we are seeing encouraging moves from the Chinese government to loosen fiscal policy and relax its iron grip on markets like tech. The People’s Bank of China has decided to cut the amount of foreign currency financial institutions are required to hold in reserve, signalling a decision to support the renminbi, which has dropped more than 5% against the dollar in 2023.
Authorities have also lowered downpayment requirements for first and second-home purchases and cut interest rates for existing mortgages across large cities to help revitalise the flagging housing market. And tech shares jumped after the government gave approval for five Chinese tech firms, including Baidu and SenseTime Group, to launch their artificial intelligence (AI) chatbots to the public.
Emerging markets specialists like John Malloy believe that low equity valuations and pro-growth steps from Chinese authorities mean that the risk/reward calculation for betting on China is favourable. Indeed, with consensus forecasts for GDP growth of between 5.2% and 5.4% for the year, China’s economy is still growing at a rate many developed countries will envy.
We agree that there may be some upside in Chinese equities in sectors such as AI, healthcare, semi-conductors, and renewable energy. But as we noted in one of our articles about China, we also remain cautious about the command-and-control nature of its economy and the consistency of regulation as well as the opacity of some of its economic data.
The MSCI World Index underrepresents this giant on the world economic stage, and we, therefore, are of the view that it would be remiss not to include some direct (but considered) exposure to China for our growth oriented global investors. We have achieved this in our house-view global equity fund through a small exposure to a basket of specific Chinese shares that meet our proprietary quality criteria, believing that this will provide the opportunity for our investors to benefit from a possible revival of China’s economic fortunes over the medium to long term.
“Valuations are cheap, growth is starting to bottom out and positioning is also favourable. It’s hard to determine how much downside there is, but the risk-reward is incredibly favourable for emerging-market stocks right now.”
– John Malloy, co-head of emerging and frontier markets at Redwheel with specific reference to China
Global News
- China’s slowing economy is expected to hit other countries’ GDPs as its imports of everything from construction materials to electronics will decline. To help the economy grow, China’s largest banks are preparing to cut interest rates on existing mortgages and deposits.
- The People’s Bank of China has met with lenders and private businesses, promising to improve their access to funding in an effort to boost economic growth.
- Year-on-year, there has been a 36% increase in the trade China is doing with Russia, as China helps prop up Russia’s economy.
- 30-year investing veteran, John Malloy, who helps manage about $10 billion in equities as co-head of emerging and frontier markets at Redwheel, believes that “everything is coming together” for a rally in China’s equity market after a week that saw shares slide to fresh 2023 lows. The $1.6 billion Redwheel Global Emerging Markets Fund has beaten 60% of its peers this year and has a 37% exposure to China.
- Chinese President Xi Jinping is planning to skip next week’s Group of 20 summit in New Delhi, snubbing India. Tensions between BRICS countries have already been rising, with China blocking draft proposals on language regarding emerging-market debt and condemning Russia’s war on Ukraine, according to sources.
- Central banks continue to be vexed over inflation and its potential trajectory. The world’s top central bankers, at an annual Federal Reserve gathering in Jackson Hole, Wyoming last Friday, stressed the need to keep interest rates high until inflation is contained, but are wrestling with deeper economic shifts that will make their jobs harder. Federal Reserve Bank of Atlanta President, Raphael Bostic, separately stated that policymakers must be cautious not to overtighten monetary policy and risk unnecessary harm to the US labour market.
- Stocks were stirred up at the end of August after this year’s rally. Traders are worried that the Fed will keep interest rates higher for longer to prevent a flare-up in price pressures. The S&P 500 finished August with a small monthly decline of 1.6% on Thursday, its first monthly slide since February, but has still enjoyed a rally of 18.7% for the first 8 months of 2023.
- In Australia, July consumer prices rose significantly less than expected (4.9% year-on-year versus an expected 5.2%) and, while not a major focus for global investors, this reinforces the general global disinflation narrative and the idea that profit-led inflation is in retreat, according to UBS.
- OpenAI is on track to generate $1 billion of annual revenue as businesses adopt the technology behind ChatGPT, the generative AI bot that ignited a wave of artificial intelligence investment. It earns around $80 million a month.
- Denmark’s Novo Nordisk, a key holding in the Fundsmith Fund, has grown so big that it is reshaping the Danish economy fuelled by Ozempic and Wegovy, which have been proclaimed as revolutionary in the field of obesity. Economists are now debating whether the country needs to publish another set of GDP statistics that strips out Novo Nordisk.
- Apple will hold its biggest product-upgrade event of the year on 12 September 2023, when it will unveil the iPhone 15 line and next-generation smartwatches. Apple is also testing the use of 3D printers to produce the steel chassis used by some of its upcoming smartwatches. Its sales have slid for three straight quarters as the company contends with shaky demand for smartphones and other devices.
- Switzerland’s UBS Group has posted the largest quarterly profit on record for a lender thanks to its emergency takeover of rival Credit Suisse. The news sent UBS shares higher in Zurich, with investors seeing positive signs on the integration of the two companies. UBS gained $29 billion on an accounting gain but will cut 3,000 positions in Switzerland as a result of the merger.
- As at Thursday’s close the S&P was 2.3% up for the week.
Local News
- National Treasury, should remain insulated from the ANC’s practice of cadre deployment for it to function effectively, says Finance Minister Enoch Godogwana. He joins a list of opponents of the ANC’s deployment policy — including opposition parties and civil society organisations. The most serious instance of inappropriate deployment to the Treasury was in December 2015, when the department was temporarily captured through Zuma’s appointment of Des van Rooyen as finance minister. An inefficient and misdirected Treasury poses a huge risk, not only to South Africa’s ratings internationally, but also when it comes to Foreign Direct Investment.
- National Treasury’s figures showing that the budget deficit grew to R143.8 billion, the largest since at least 2004 and higher than predicted, caused the rand to drop. Yields on South African local-currency bonds rose this week.
- Business Leadership SA CEO Busi Mavuso has stated that state capture remains prevalent among SOEs as decision-making power has been taken away from boards and were likely being made between ANC headquarters and government departments.
- Finance Minister Enoch Godongwana has warned that Eskom’s blackouts and Transnet’s inefficiencies have undermined any efforts to grow the economy this year. This could lead to massive budget cuts in the October Medium-Term Budget Policy Statement in order to prevent a collapse in public finance.
- The Department of Public Enterprises, which oversees seven state-owned enterprises will not exist after next year’s elections, in line with an announcement to that effect by Ramaphosa. A new holding company for the entities will be created.
- Ninety One expects inflation to average 5.8% this year, and 5.1% for 2024 (which is below SARB’s expectations). Its view has changed from the potential for another hike, to rates being dropped by about 60bps next year.
- Woolworths plans to invest R10 billion into its South African business over the next three years, expanding the size of existing stores, as well as seeking to add new shops to its portfolio, bulk up its back-end supply chain, and invest in new technology. The group’s turnover rose 7% for the full financial year, and its total dividend was upped by just over 36%.
- As at the time of writing, the rand was 0.4% weaker and the ALSI was 1.3% up for the week.
Sources: Dynasty, BusinessLIVE, Daily Maverick, Bloomberg, NYT, ITWeb, Reuters, TechCentral, EWN, Moneyweb, NinetyOne, UBS, DailyFX, News24, etc.
